France’s finances are in shambles, and the mass protests reflect it

Last week I wrote about the stability that utility subsidies provide for investors, families, and the economy. The article couldn’t be timelier. Some are saying that we mustn’t give a blanket subsidy, while others are stating that we should have introduced additional cents on diesel a while ago, in 2022. The truth is that the subsidies are here to stay, and the PL’s policy is to maintain the same approach to retain stability.

Expected inflation must be curbed, not accelerated

When you have an increase in prices, a shock that in 2022 came from the war in Ukraine, adding costs for consumers and producers would have accelerated the price increase. What the European Central Bank does, and other Central Banks around the world do, is to increase interest rates to curb inflation. As a result, an increase in interest rates causes the economy to slow because the cost of capital increases, while investors and consumers’ confidence drops, and we typically experience sluggish growth or even a contraction, which imposes additional hardship on families and businesses.

Expected inflation is the first thing to manage when prices rise. When businesses and consumers anticipate that the central banks are fighting inflation, inflation expectations start falling, and the rate of price increases decelerates. So, while you have ongoing inflation, you don’t add additional cents to utility bills, irrespective of the minimal impact or outcome, or the revenue generated. That was my argument last week when I wrote about it on social media. I have already said that the BCRS introduction of 10 cents on bottles was ill-timed in 2022, due to expectations of price increases, let alone an additional increase in utility bills. I understand that the comment from local economists is genuine, and that the necessary measures were calculated. However, even if the policy yields additional revenue to the government, in my view as an economist, it would have been ill-timed. As economists, we may not always agree or converge on policy issues, and our arguments may differ. However, we engage in these debates respectfully.

France is dealing with mass protests because its finances are in shambles

So, while we have an ongoing discussion here in Malta about energy subsidies, other European Union states are in an economic mess. Such a mess is due to insufficient funding for various merit goods. Whatever anyone says, if we don’t have money and the economy doesn’t grow, we cannot sustain what we have. And this is what is happening in France right now. If you open the media and watch what is happening, you can see mass protests due to a lack of funding for education. Indeed, university students and high school students are asking for additional investment in French schools. It seems that even the largest unions are joining the protest, which is bringing a new movement or coalition between the largest unions and civilians. It seems that even parents and other union activists are gathering in the streets and squares, wearing white armbands in support of teenage students. During the past week, students blockaded several schools, with many young people reported injured and over 700 police officers hurt. It has also been reported that over 6,000 people were arrested.

What is disproportionate is the use of tear gas against civilians. The people of France are speaking. They have had enough of austerity measures. And, this goes beyond austerity measures. The problem is that France’s economy is in shambles. Even if people demand additional funding, the funds cannot be ringfenced to education, as most of the money is going elsewhere. France’s debt-to-GDP ratio is around 119%. That is not just breaking the six-pack and two-pack rules of the governance of the Euro, but is double what it must be, meaning 60%. At this rate, France risks exerting downward pressure on the euro area, especially the euro as a currency. France cannot provide additional funding for schooling, and, more so, it cannot pay additional money for the Multiannual Financial Framework, and, worse, to fund defence measures. Imagine if this situation were happening in Malta. Hell would break loose if we had this kind of debt-to-GDP ratio, which for us in Malta stands at around 46% of GDP. With this rate, France’s debt-to-GDP ratio will be three times of Malta’s. For 2026, the projected deficit for France is 5.5%, which means that whatever is being demanded is a fallacy. It won’t be honoured.

Housing affordability crisis in Europe and a Commission’s Consultation Paper

If you look at what is happening in Spain, there is a housing crisis, with many being priced out of the market and pushed out of their properties. The Spanish Prime Minister, Pedro Sanchez, just resigned from office and called for an early election. The problem is not just in Spain, but it is an EU-wide problem. I saw a paper outlining the rate at which prices rose in the past years. The EU just issued a consultation paper to determine how it can alleviate the housing problem. At this rate, the EU will enter every market, and instead of allowing the market to work, it jumps in to fix it. So, the ideology of the free market is slowly degenerating in control. Mind you, I agree that something must be done in the property market because prices in some states are approaching absurdity. And with the economy struggling for growth, and median incomes still increasing at a very low rate relative to housing prices, it is becoming difficult for first-time buyers, the elderly, and single people.

Meanwhile, here we can say that energy prices will remain stable, free childcare is guaranteed, no new fiscal taxes will be introduced, and the national insurance will be kept at this level. The projected deficit-to-GDP ratio will be around 2.8% next year, below the 3% required by the Six-Pack and Two-Pack rules of Euro governance, and debt-to-GDP is well below the required level. This fiscal space is allowing the Maltese government flexibility to help families. We can sustain ourselves through bad times, and the most important thing at this stage is stability. We will wait for the Budget 2026 to see what will be announced.

Personally, I’ve known Minister Clyde Caruana for nearly a quarter of a century, and I can say with confidence that we are in safe hands.